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There is no doctrine in the UK Treasury at present

Kitty Miv, Editor
27 March, 2014

Kitty's Kountry Rankings are below, with a description of how they are kompiled. This week, as every week, I give out Encomiums to countries which have done Good Things, and award Execrations for countries which according to my highly personal and partial views have done Bad Things.

By George! The UK's Chancellor (Finance Minister) seems to have brought off the impossible by announcing a budget which everyone agrees with. Of course the Opposition (its duty is to oppose, as they always say) sent up some ritual distress flares, but they illuminated more of Labour's distress than Osborne's. Different commentators had different takes on the cleverness of the Budget, from very clever to surpassingly clever; but no-one called it stupid. Everyone realizes that it is an electoral Budget; that is hardly worth saying. What is perhaps worth observing is that there is no doctrine in the Treasury at present; there is just a cold calculation of how to retain and increase political power. Like it or not, this is the most impressive governing engine that has been seen in Whitehall for decades. And in fact there is quite a bit to like. In particular the abolition of forcible annuities for pensioners is a move in the right direction. It has long been an outrage that 75-year-olds are compelled to convert their pension savings into annuities at contemptible rates dictated by a small coterie of unaccountable City insurers. Not only is it morally correct that people should be able to make their own choices of how to deploy (or waste) their savings, it will almost certainly increase the tax take at the same time as increasing personal freedoms. It is not given to many politicians to achieve both in one stroke. Old Etonian or not, it is becoming difficult to see how George Osborne can avoid becoming Prime Minister at some point. If there is an agreement to that effect between him and his friend, David Cameron, as there was said to be between Tony Blair and his ill-starred Chancellor Gordon Brown, it has not been revealed. They are much too clever to talk about such a thing in public.

It's a healthy sign, I suppose, that some of the EU's intensive care patients are starting to talk about reducing income tax rates. We can only applaud Ireland, Spain, Portugal and Italy for their moves in this direction. Among the four, only Italy has gone beyond words, with tangible cuts to personal taxes, although with elections looming here and there it's only a matter of time before other countries follow along. Unfortunately, while the readiness to lower rates at least shows some understanding on the part of politicians that taxes are too high, for the most part they are shooting at the wrong target. The major problem that all these countries have is lack of growth, and improving the lot of wage-earners is the least effective way of countering recession. If you put more money into the pockets of less well-off people, their immediate reaction, once they have put food on the table, is to save more, which may be very praiseworthy, but does nothing directly to stimulate the economy. What is needed is more jobs, and this can only be achieved by reducing the burden of taxation and bureaucracy on business. Governments do seem to know this, judging by their rhetoric, yet the measures they take are puny in relation to the size of the problem.

Partly that is due to the cost of achieving a meaningful reduction in business taxation, but surely most of it is due to reluctance on the part of "the establishment," the "powers" or whatever you want to call them to understand and accept the need to cut loose and allow 1,000 flowers to bloom, even if most of them are fiscally noxious. This involves cutting back oversight and control, anathema to most governments, along with cutting back taxes. It's like sowing seeds: it may be only a tiny grain of genetic potential, but allow it to grow and wonders emerge. Tax cuts are necessary, of course, but chopping away at the forest of regulators and the thickets of red tape is equally or more important, plus it saves money. Every regulator who is fired gives a double boost to the economy: less impediment to small business and less cost to the State. And it's on this level that the well-meaning leaders of cash-strapped euro-countries are failing: they talk endlessly about cuts to public expenses, yet nothing happens. The uncivil servants have seen them coming, of course, and are well-defended. It is a race against time, now, as to whether these states which are being eaten away from the inside by their cancerous public workforces can reform themselves before they collapse, and the signs are not good.

If one name has been prominent through the vicissitudes of Australian fiscal policy during the last ten years it has to be that of Dr Ken Henry. He was charged with redesigning the Lucky Country's tax system, and has done his best, in the face of despite a large degree of inaction on the part of government in response to his recommendations. Now, he says that crisis is imminent, and indeed some scary numbers were thrown around by the outgoing Labour administration, while the new Abbott team has been tight-lipped about the Government's fiscal situation. Last August (springtime in Australia), a joint statement issued by Treasurer Chris Bowen and Finance Minister Penny Wong noted "significant downgrades to tax revenue due to lower terms of trade, falling commodity prices and other factors." They revised down projected tax receipts by AUD7.8bn (USD6.98) in 2013-14, and AUD33.3bn over the period to 2018. Then in November the Grattan Institute said that "Australia needs leaders prepared to make brave decisions to raise taxes and cut expenditure." The Institute said that Government spending had been rising, while tax receipts were falling. The Government would need to prepare people for pain.

The underlying problem is presumably that the long-running mineral commodity boom has accustomed Australians to built-in growth, and there has been little need to control expenditure. Astonishingly, Australia has seen average growth of 6.5 percent for the last 20 years. But falling commodity prices sapped growth in the year to last September (when the election took place) to below three percent. In December, the government forecast a AUD47 billion budget shortfall this fiscal year, in its first economic update since winning the elections, equivalent to three per cent of national output, and 50 percent higher than the outgoing administration had predicted. New Treasurer Joe Hockey aims to reduce that deficit to zero within a decade, but the Government has not been specific about how it will close the gap. The Institute's report said that it was unable "to identify expenditure cuts large enough to fix Australia's long run budget challenges," and that any program of changes must therefore include tax hikes, for without them, "budget repair will be hard for Australia, given that its government is relatively small, and major revenue sources like the G[oods] and S[ervices] T[ax] are in structural decline."

Compared with many other G20 members, however, Australia is in good shape, and it's possible to overdo the gloom. With debt at barely more than 20 percent of GDP and solid AAA ratings from all the major agencies, even larger deficits can be financed with ease, and this is presumably Joe Hockey's comfort blanket. In the country's longer term interests, let's hope that he doesn't hang onto it too tightly come budget time in May.


Kitty's Encomiums and Execrations

Methodology: each week (this is the 97th) two or three countries are given encomiums and two or three are given execrations. Those are the entries below with descriptive links. In the following week, each encomium counts as + 1 for that country, and each execration counts as – 1, being added to that country's existing score. Over time, therefore, a ranking will build up for each country, and further countries will join the listing. Germany is at neutral, since in the second week it had an execration and in the first week it had an encomium, leaving it at neutral; then it had an execration in week four, thus dropping to – 1, and another one in week six, dropping to – 2; finally in week 13 it got something right, so it went back up to – 1; then in week 16 it gained a further star, so then it was in neutral territory until week 23 when it dropped back to minus one, but reverting to neutral territory in the following week, then dropping to minus one in week 50, and back up to plus one in week 51, then to plus two in week 52. Some weeks ago it dropped a place, but then quickly recovered one step. Etc etc and now it's on plus 1 again.

The rankings are intended to be a proxy for business friendliness; evidently they are highly partisan, but as time goes by they are becoming useful for decision-making. For any country in negative territory, you should think carefully before starting a business there.

Kitty's Encomiums:

Spain to cut taxes?

United Kingdom sails serenely forward

And Kitty's Execrations:

Australia on the road to ruin?




About the Author

Kitty Miv, Editor

Kitty was born in Argentina in 1960 to a Scottish cattle rancher and his Argentine wife. Educated in Edinburgh and at Princeton, Kitty worked for the World Bank as an economist, where she met and married an emigre Iranian banker. During her time with the Bank, Kitty worked in a number of emerging markets, including a spell in the ex-USSR as a Transition Economies Team Leader. Kitty is now a consultant in Brussels and has free-lance writing relationships with a number of prominent economic publications. kitty@lowtax.net


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